Electricity prices expected to skyrocket this summer

Consumers hoping to find better deals when their electricity contracts expire are in for a shock as retail prices have soared in anticipation of hot weather, potential power shortages and spikes in wholesale electricity prices.

The low teaser rates for consumers available just a month ago have disappeared, making it impossible for buyers who average about 1,000 kilowatts a month to lock in a three-month rate for less than 18 cents a kilowatt-hour, according to PowertoChoose.org, the price comparison tool run by the Public Utility Commission of Texas. A year ago, Texans shopping for a three-month contract could find rates that were less than 7 cents a kilowattt hour while earlier this spring, bargains were still available for less than a nickel a kilowatt hour.

“It’s harder to find a good deal,” said Fred Anders, founder of Texas Power Guide in Houston, a website that calculates the cost of retail electricity plans.

Prices on longer term plans of a year or more have also risen significantly. Retail electricity providers are reluctant to discuss their prices — especially rising ones — but the Association of Electric Companies of Texas, a trade group, estimated that the rate on a one-year fixed price offer on the Power to Choose website has climbed more than 20 percent over the past year to an average of 11.1 cents per kilowatt hour.

Patrick Mays, an engineer for an oil and gas company in Houston, recently went shopping for a new electricity plan and found that the best deal available would cost about 55 percent more than what he’s paying, boosting his average rate to 9.5 cents per kilowatt hour from 6.1 cents under his expiring 12-month contract. The power bills for his 2,000-square foot home will climb an average of $30 a month over the year, he said, but he will take the brunt of the rate increase during the hot summer when he estimates his monthly bill will top out at $186, nearly double the $95 he paid last year.

“I was not expecting to pay as much,” said Mays.

The increase in retail rates come as companies prepare for surging prices in the wholesale electricity markets where they buy their power. Forecasts of higher than normal temperatures and record power demand are coinciding with the shutdown of at least three coal-fired plants, leading to concerns that temporary shortages on the hottest summer days could send wholesale prices, which typically average less than $50 per megawatt hour, spiking to $3,000 per megawatt hour or higher. (A megawatt hour is 1,000 kilowatt hours.)

Prices are expected to go up so quickly that Direct Energy has stopped selling its “Power-to-Go” plan to new customers this summer, a prepaid plan that changes rates each month depending on wholesale prices. Instead, the company is encouraging its customers to lock in for longer periods of time. Customers who used up to 2,000 kilowatts each month could get a 12-month contract for 11.7 cents per kilowatt hour in May compared to the same plan for 9.1 cents per kilowatt hour one year earlier.

Electric companies buy longer-term contracts so they can hedge their risks when they’re selling long-term electricity plans. Just a week ago, it looked as if wholesale prices would be as high as Texas has seen in the past 15 years, said Ned Ross, director of governmental affairs for Direct Energy, the third biggest seller of electricity in Texas, behind No. 1 NRG and No. 2 TXU. Future prices have retreated recently, but companies buying power for August are still paying at least double what they paid a year ago, according to data from the Electric Reliability Council of Texas, or ERCOT, which oversees the state’s power markets.

The threat of price spikes have been long in the making, the result of changing economics of power production. The shale drilling boom produced record amounts of natural gas, which pushed prices to all-time lows and made gas-fired plants cheaper to operate than coal. Renewable energy such as wind is also producing abundant amounts of electricity at a lower cost than coal.

As a result, power companies have shut down Texas coal plants unable to compete with lower-cost generators. Meanwhile, the low electricity prices of recent years — a function of cheap natural gas — and small profits have discouraged companies from investing in new power plants. ERCOT, which oversees about 90 percent of the state’s power grid, said power reserves that are called on when demand peaks on the hottest summer days have shrunk to the lowest levels since Texas deregulated power markets in 2002.

“I think everyone is a little uneasy,” said Thomas Brocato, general counsel for the Gulf Coast Coalition of Cities, a group of 36 cities in the Houston area that have banded together on electric utility matters.

So far, expectations of soaring wholesale prices is greater than what’s happening in the market. The seven-day average wholesale price in Houston on June 1 was $37 per megawatt compared to $60 per megawatt one year earlier, according to ERCOT. But the threat alone of higher costs is already having an impact on the retail market.

Energy sellers must provide collateral to ERCOT to cover expected future costs of buying wholesale electricity and if the companies don’t have enough capital, they get shut down. Breeze Energy, a Dallas-based electricity retailer that sold wind-energy plans to 9,800 customers including many in the Houston area, got caught in that financial squeeze when it defaulted on its collateral obligations.

ERCOT would not say how much Breeze Energy owed. Breeze Energy did not return calls for comment.

ERCOT last week notified Breeze Energy’s customers that they had been shifted to other providers at higher rates. The Public Utility Commission urged customers to shop for new contracts quickly to lock in better rates.

Among the companies assigned Breeze Energy customers was Reliant Energy, owned by the power company NRG, which has headquarters in Princeton, N.J. and Houston. NRG also owns retail electricity companies Cirro Energy, Green Mountain Energy Co. and Pennywise Power.

Pat Hammond, a Reliant spokeswoman, said wholesale prices during times of peak demand — typically late summer afternoons when air conditioners are going full blast — have so far run an average of about $200 a megawatt hour compared to $55 a megawatt hour last summer. That has helped increase what retail customers are paying.

Consumer advocates, meanwhile, recommend that consumers lock in power plans with fixed costs so they don’t have to worry about wholesale power price surges. About 10 percent of the customers in the Houston area don’t have contracts, paying rates that change each month.

“If you’re not in a fixed price deal, those high (wholesale) prices can trickle down,” said R.A. Dyer, policy analyst for the Texas Coalition for Affordable Power in Austin, a group of cities that buy electricity in deregulated markets.